David R. Henderson  

Mark Thoma on NAFTA

Home Schooling Questions: Econ... Portugal after the elections...

Yesterday, economist Mark Thoma wrote a piece on Donald Trump's claim that NAFTA was a disaster. It's titled "Is Donald Trump right to call NAFTA a 'disaster'?"

I thought Thoma would say it wasn't a disaster because, however imperfect NAFTA was--and it was imperfect--it was a step toward free trade. (It was also a customs union, which isn't the same as free trade but, on net, it was a step toward free trade also.) Thousands of tariffs were cut, sometimes to zero, on Mexican products sent to the United States and on U.S. products sent to Mexico. When taxes (tariffs are taxes) are cut on goods that you buy, you're better off.

But that's not how Thoma judged NAFTA. Instead, he wrote:

Is he right? Was NAFTA a disaster? The answer to that question depends on how we measure the results. For the U.S. -- where the Bill Clinton administration sold the agreement as a job-creating policy because U.S. exports would grow by more than its imports -- the agreement has not lived up to its promise.

Estimates vary, but it appears that somewhere in the neighborhood of 350,000 to 700,000 jobs were lost due to the agreement, and when these workers eventually found new jobs, their incomes fell slightly (though some claim that incomes went up modestly).

Of course, Thoma has every right to use whatever standards he wants to judge trade agreements. He chooses the standard that Bill Clinton chose. I find that strange given that he is an economist and economists tend to judge trade agreements by how much they benefit not just producers, but also consumers. Indeed, probably over half the benefits to a particular country from a trade agreement is the gain in variety of, and drop in prices of, imports.

But Thoma says not a word about consumers.

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CATEGORIES: International Trade

COMMENTS (21 to date)
Don Boudreaux writes:

David: I also read Thoma's piece and was even less impressed than you are. Not only does he ignore consumers, he doesn't question the silly popular notion that trade is to be judged by how many jobs it creates or destroys. Economists have long been in significant agreement - and for good reason - that changes in the pattern or intensity of international trade neither increase nor decrease, over the relevant time span, the overall number of jobs in an economy; what trade changes is the kinds of jobs that are performed in an economy.

Of course Bill Clinton sold NAFTA as a jobs-creating treaty. Politicians notoriously get the economics of trade wrong even when the trade policies they pursue are economically right. "Freer trade will create more jobs!" "Freer trade will increase our exports!" Such mistaken claims work with the general public because the general public has a mercantilist view of trade. But economists since even before Adam Smith have rejected such claims. Yet Thoma accepts such claims as an appropriate standard by which to judge the merits of NAFTA. That's surprising and disappointing.

Finally, Thoma's link (apparently in approval) to Robert Scott's assessment of NAFTA's effect on jobs is also disappointing. Scott's analysis is strong evidence that he does not understand the manner in which freer trade creates jobs to offset the jobs that it 'destroys.'

John T. Kennedy writes:

Can 60,000 pages of regulation (or whatever it was) really be a step toward free trade? Doesn't NAFTA strongly confirm the pernicious idea that free trade is something that can and ought to be negotiated between governments, especially if you grade it a success?

ThomasH writes:

While I agree that "jobs" are not the right criteria by which to judge a trade agreement, we ought to see that the reason it is not is that we do and usually should assume that the output (that is consumed or invested) from the "lost" jobs does not disappear down a rat hole, but is compensated by output when the unemployed people and capital are re=employed in other activities.

Unfortunately, because of very poor macroeconomic policies especially since 2007 this condition has not been met. I think it is quite possible that with enough constraints on re-employing resources between sectors a move toward freer trade could produce losses.

Just as it's the Fed's job to make Say's Law true in practice even though it's false in theory, it's also their job to make the benefits of free trade as true in practice as it is in practice.

Nathan W writes:

I support free trade as a general principle.

But if politicians are selling us on its merits as a job creator, we should measure it by the metrics it is sold on.

Politicians should try to speak to citizens like adults, and try to explain the logic on longer term benefit of competition for productivity, access to lower price consumer goods. They should tell the full story. But politicians KNOW that when they say "access to lower goods" that voters will understand the possibility of job losses. So they need to counter this by selling voters on the upside - access to foreign markets which may increase jobs.

My general logic here is that programs should be measured by their stated objectives, not peripheral side effects. If the "peripheral" side effects are indeed the objective (long term productivity gains via competition, access to cheaper inputs and final consumer products), then they should be sold according to those objectives.

Don Boudreaux writes:

Nathan W: Because of rational ignorance, rational irrationality, and a host of other problems that infect political decision making, the 'choices' and 'actions' of a collective cannot sensibly or productively be judged by the same standards by which we judge the choices and actions of sentient, purposeful human beings. But put this deep problem (largely) to the side.

Politicians sell freer trade on the mistaken grounds that they do because such grounds are ones that maximize the likelihood that the public will accept freer trade. Yet is is likely enough that the public interprets these false sales pitches to mean, ultimately, something like "free trade will make our people more prosperous" - which it in fact will do. The particular means used by most freer-trade politicians of selling this prosperity-enhancing policy to the general public is devious (or, at least, poorly informed), but it's no stretch at all to suppose that if the general public understood just how freer trade improved overall economic well-being, they'd support it.

Please understand that I do not endorse such deviousness; I wince and cringe whenever free-trade supporters assert that it will increase overall employment or increase net exports. But whenever an economist, which Mark Thoma is, assesses whether or not a move to freer trade worked, I believe that that economist should not accept the silly standards trumpeted by politicians but, instead, should use standards employed by informed economists.

One final note: even ignoring the above, Thoma should have been far more skeptical of claims that NAFTA actually reduced overall employment in the U.S. The piece he linked to by Robert Scott (allegedly showing that NAFTA caused net job losses) is, economically speaking, a barrel of hyenas.

Effem writes:

If you "sell" an agreement on job creation, then you should evaluate an agreement via the same metric. Otherwise, you've simply practiced a bait-and-switch, which I think even an economist could see is wrong.

Glen Smith writes:

Simple measure is how long it would take me to earn enough to live on the adjusted costs without a job. To make it a bit more clear, if before the agreement, I always needed to maintain my employment and post agreement, I don't need my job as much great.

Kevin Erdmann writes:

Don said it better than I could. How could Thoma write that? It seems to me that what Thoma is complaining about is the very sign of NAFTAS success. Out of work travel agents, typists, and retail clerks are a result of the progress of personal computers and the internet. Does he think these things show that the internet didn't live up to its promises?

Not to mention that US wages and employment in the years immediately following NAFTAS passing were very strong.

SG writes:

I love it when lefties argue about NAFTA because it gives me a chance to bring up Paul Krugman's delightful NAFTA article from the early 90's.

Krugman pointed out that:
"the whole idea of counting jobs gained and lost through trade represents a misunderstanding of the way the U.S. economy works. In particular, it overlooks the fact that other economic policies, especially monetary policy, will almost surely neutralize any potential impact of NAFTA on jobs."

He goes on to provide a crystal clear explanation of monetary offset, which is conceptually identical to the points that Scott Sumner has been hammering these last 7 years or so on his blog.

People change, unfortunately :(

Nathan W writes:

Kevin - post-NAFTA years were quite good, but recall that this was the boom part of the business cycle (just exiting a recession in the early 1990s), and arguably when all those huge investments into PCs and software training were finally starting to pay off. I think you'd need to have some more cause and effect sort of reasoning which combined production data at the sectoral level, with trade data disaggregated between trading partners.

Kevin Erdmann writes:

Nathan W.,

I agree that these effects would be very difficult to isolate. For the most part, in a complex open system like the US economy, the result of research that attempts to measure these things is more a reflection of what the researcher decided not to measure than it is a reflection of the actual policy. If a certain kind of rubber grown in the Yucatan can be more efficiently imported into the US to complete a part that is used in South Korean smart phones that are assembled in China, I wouldn't begin to know how to account for that. It clearly is a benefit to humankind, but almost all of the benefits of trade come through these 2nd and 3rd order effects, and many of the costs are visible, because progress disrupts the status quo, and that is easily measured.

But, my point isn't so much to say that employment in the 90s proves NAFTA was positive. It's only to say that complaining about NAFTA leading to disemployment requires a healthy dose of willful ignorance about some pretty positive and obvious economic trends that were happening at the time. It should be a line in that Alanis Morisette song, "Isn't it ironic". "It's like 10,000 spoons, when all you need is a knife. It's like complaining about employment dislocations from trade expansion during the strongest labor market in a generation."

By the standard people like Thoma are using, there is literally no reasonable possible outcome that could lead to their support.

kingstu writes:

The best job creation program would be to outlaw electricity. I call it the Amish Job Creation Act.

MikeDC writes:

I think the big problem (that Thoma is probably aware of as a journalist but academics tend to overlook) is that touting the benefits of consumption is about as popular an argument as farting at a formal dinner.

Consumption, consumers, consumerism, etc are all dirty words in public discourse. Companies that bring popular low cost goods are protested and vilified.

To sell additional consumption opportunities as a benefit of trade, you first have to sell them as a good thing.

Ron writes:

Seems to me that an economist would have to be rather dull not to see how a country could possibly lose out from freer trade, or at least that the benefits might accrue to a very few while the burden was imposed on a great many.

David R. Henderson writes:

Seems to me that an economist would have to be rather dull not to see how a country could possibly lose out from freer trade, or at least that the benefits might accrue to a very few while the burden was imposed on a great many.
Traditionally, free trade has benefitted most people and hurt few. Is the opposite possible? Sure. But that’s not what Thoma was claiming. He literally didn’t address a large part of the benefits.

Don Boudreaux writes:

Seems to me that an economist would have to be rather dull not to see how a country could possibly lose out from freer trade, or at least that the benefits might accrue to a very few while the burden was imposed on a great many.

What David said, plus this:

Of course it's possible that a country could lose out from freer trade. "Possible" is a terribly weak standard. It's also possible that a country could lose out from freedom of the press, or from open and regular elections in place of totalitarian dictatorship, or from the introduction of antibiotics or indoor plumbing or affordable household refrigeration. A great deal is possible. And many clever economists have made fine careers for themselves detailing the many possibilities of how countries can possibly lose out from free trade (and from free markets more generally).

Yet what really matters, far above what's possible, is what's probable. Determining what's probable (as opposed to the much easier task of detailing what's possible) requires wisdom, a sense of history, sound judgment, and the maturity to avoid showing off one's I.Q. to others.

And a person in possession of such wisdom and maturity understands also that there is nothing whatsoever about international trade (as opposed to trade and economic activity generally) that renders the freedom of consumers to choose to spend their money as they please especially likely to inflict net harm on the domestic economy.

Nathan W writes:

Without even seeing a word of the agreement, when an agreement is negotiated behind closed doors with plentiful corporate lobbyists and zero representatives of consumers and labour, it is easy to assume that consumers and labour will get a raw deal.

There is an exceedingly strong logic of free trade in the long run. But why should corporations enjoy all the benefits while costs are borne by labour and consumers?

How do consumers benefit from a rule that requires all ISPs to turn over all data to authorities, for example, and what on earth does a clause like that have to do with free trade? That consumers will lose broadly in free trade might seem silly. But consider that many countries will experience reduced access to generics. As for labour, it is exceedingly obvious that labour will get shafted. Since when do people who are excluded from negotiations get a good deal?

I refer to TPP and not NAFTA of course, but isn't that what the debate about NAFTA is really about?

David R. Henderson writes:

@Nathan W,
I refer to TPP and not NAFTA of course, but isn't that what the debate about NAFTA is really about?
My post--and Mark Thoma’s--was (were?) about NAFTA. NAFTA was primarily about trade although there might have been some other aspects.

Nathan W writes:

I assumed that the relevance/interest of discussing benefits/costs of previous free trade trade deals was that there's another one headed for congress right now.

Sorry if I assumed wrong.

David R. Henderson writes:

@Nathan W,
Sorry if I assumed wrong.
No need to apologize, Nathan.
But if you look at Mark Thoma’s whole article, it really is just about NAFTA. Why write it now? Because he was replying to Donald Trump, who is trying to reopen the whole NAFTA debate. Not knowing Mark Thoma personally, I don’t know his motives. However, I do know mine, at least most of the time. :-) And I really was replying to Thoma about NAFTA, not TPP. Those are pretty different agreements or, at least, I think they will be.

Ted writes:

The difficulty with analyzing the economic effects of "free" trade agreements lies with evaluation of long-term costs. The devil is in the details. There is a persistent misconception about the underlying costs incurred by encouraging segmentary overproduction as a compensatory factor for the regional loss of aggregate individual income.

Using the TPP as an example, wine exports are one of the most publicized "selling points" for the agreement. Given soil depletion, salination of cropland owing to over-irrigation, habitat loss through encouragement of increased monoculture and the cascade effect of loss of housing expansion capacity through acceleration of land pricing hyperinflation, the true costs of the market increase represented by expanded wine exports, particularly from California, are deliberately obfuscated by those who know very well what they are doing.

It does not benefit consumers to decrease the costs of non-essential goods when the net effect of increased exports and imports is to raise essential costs within areas of stagnant aggregate income.

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